DECEASED ESTATES INCOME TAX AND VAT Presented by: Di Seccombe National Head of Tax Training and Seminars Mazars

Deceased Estate

After the date of death a new taxpayer is created, the deceased estate.

The executor must complete the return of income derived by the estate and submit the resulting claim for normal tax against the assets of the estate.

Register for tax as a category “a” special trust

In an assessment of the deceased estate, the deceased estate is taxed at the same rate of tax as a natural person, however the deceased estate does not qualify for personal rebates in terms of section 6.

The taxation of income which is received by or which accrues to the deceased estate is governed by section 25

Deceased Estate Section 25

Liability of heir or legatee

Section 25(1) provides that any income received by or accruing to

the executor, including any amount so received or accrued, which

would have been income in the hands of the deceased (had it been

received or accrued to the deceased during their lifetime) shall:

if such income or an amount has been derived for the immediate

or future benefit of any ascertained heir or legatee, be deemed to

be income of such heir or legatee, and,

if not, be deemed to be income of the deceased estate.

In order for an heir or legatee to be an ascertained heir or legatee, a

vested right to the income is required. The income to which the heir

or legatee has a vested right shall retain its identity in their hands.

Deceased Estate Section 25 deductions

Deductions and allowances

Section 25(2) provides that any deduction or allowance which

relates to any income of an heir or legatee in terms of section

25(1) shall be deemed to be a deduction or allowance of such heir

or legatee.

Similarly, the estate is entitled to the deductions or allowances

relating to the income taxed in its hands.

If the expenditure relating to income deemed to be the income of

an heir or legatee in terms of section 25(1) exceeds that income it

appears that the heir or legatee may set off the loss against other

income. The deductions and allowances are not “ring-fenced” as

they are in the case of trusts.

TLAB 2015 first draft

EM TLAB 2015 first draft (22 July 2015, page 7)

New section 9HA

“In principle, gains and losses of whatever nature will, in terms of

the unified rules, be triggered on a person’s death with the current

exceptions being preserved”

“Subsequently, income received by or accrued to the deceased

estate will be taxed in the hands of the deceased estate and roll-

over relief will be provided in respect of transfers from the

deceased estate to any heir or legatee.”

Effective date

The proposed amendments will come into operation on 1

January 2016 and apply in respect of a person who dies on or

after that date.

Deceased Estate CGT

Para 40 (8th Schedule)

Deemed disposal on death

Subject to limited exclusions (eg surviving spouse) when a

person dies he or she is treated as having disposed of all his

or her assets for proceeds equal to the market value of the

assets at the date of death.

Effect of the deemed disposal on death is that capital gains

tax is imposed on the growth in the deceased’s estate.

Potential impact on the liquidity of the deceased estate

Executor of deceased estate

Distribution of assets, or

Disposal of assets

Deceased Estate CGT

Distribution of assets

No capital gains tax arises

The disposal must be treated as a disposal for proceeds equal to

the deceased estate’s base cost of the assets

The heir, legatee or trustee is treated as having a base cost equal

to the base cost of the deceased estate

Disposal of assets

The disposal is to be treated in the same manner as if the asset

had been disposed of by the deceased eg: R3000 annual

exclusion and 33,3% inclusion rate

Capital gains arising from the disposal of assets by the executor

of a deceased estate are taxed in the hands of the deceased

estate. No flow through to heir or legatee

Deceased Estate and VAT

“VAT 413 Guide for Estates” SARS guide dated 27 March 2015

The term “enterprise” is one of the most important concepts in

the VAT Act, because –

a person that does not conduct an enterprise cannot register

for VAT; and

only supplies made in the course or furtherance of carrying on

an enterprise (referred to as taxable supplies) are subject to

VAT. The definition of “enterprise” specifically excludes, amongst

others, activities that involve the making of exempt supplies, for example, the letting of a dwelling and any activity carried on by a natural person as a private or recreational pursuit or hobby.

Deceased Estate and VAT

When a person dies, one of the following scenarios may apply:

The deceased person was registered as a vendor at date of

death (eg sole trader);

The deceased person was not registered as a vendor at date

of death but was liable to be registered as a vendor while still

alive ; or

The deceased person was neither registered nor liable to be

registered as a vendor at the date of death and the estate is

not liable to register for VAT (eg shareholder in a company).

Anything done as part of the termination of an enterprise is

deemed to be done in the course of that enterprise, eg winding

down the enterprise of a deceased person.

Deceased Estate and VAT

Representative vendor

A representative vendor (also known as the representative taxpayer)

represents the estate and has to ensure that the estate complies

with the VAT and Tax Administration Acts.

An executor that acts on behalf of deceased persons and their

estates is regarded as a representative vendor.

As such, the executor is responsible for performing all the duties

of the enterprise previously carried on by the deceased person.

The Commissioner has the same remedies against the property

controlled by the executor, in a fiduciary capacity as the remedies

previously available against the deceased person

Deceased Estate and VAT: Duties of executor

Duty to register for VAT

The administrator of an estate has a duty to register the estate as a

vendor if the deceased person was liable to register for VAT but

failed to do so before date of death.

Duty to issue tax invoices

The administrator is required to issue tax invoices in respect of

taxable supplies of goods or services made by the estate.

Duty to submit VAT returns and pay tax

VAT returns outstanding before date of death

The administrator must complete and submit VAT returns

outstanding in respect of the tax periods before the deceased

person died. Failure to do so may result in the Commissioner issuing

estimated assessments.

Deceased Estate and VAT Duties of executor

VAT returns due after date of death

The administrator must also complete and submit VAT returns in

respect of the estate for tax periods after the deceased person’s

death.

Calculating VAT

VAT due to SARS is calculated by deducting permissible input tax

from output tax levied on supplies made by the estate.

Payment of VAT

The administrator has to submit a VAT201 return and pay any VAT

due timeously.

The estate will use the VAT number of the deceased vendor

Deceased Estate and VAT Duties of executor

Once the administrator has established that the estate is a

vendor, the VAT treatment of the various transactions needs to be

considered.

During the course of administering an estate the administrator will

collect and pay claims, as well as realise (sell) and distribute

estate assets whilst acting as the representative of the estate.

It is important to consider the estate’s VAT status as soon as

possible as the liability to register (if applicable) and account for

VAT will have a direct effect on the administration of the estate.

The administrator must distinguish between taxable supplies of

the enterprise and non taxable supplies

It is important to note that the transfer of goods or services from

the deceased person to that person’s estate is not regarded as a

supply as they are deemed to be one and the same person.

Deceased Estate: Non-taxable supplies

Examples include the sale or disposal of the following:

The deceased's dwelling, holiday home, time-share interests;

Household furniture and appliances and assets acquired in

pursuance of a hobby;

Financial instruments and private investments such as life

policies, participation mortgage bonds, shares in companies,

interests in close corporations and nominee holdings;

Assets in respect of which an input tax deduction was denied

under section 17(2) of the VAT Act (for example motor cars

and entertainment assets).

The administrator should not account for any VAT in respect of

goods and services which did not form part of the deceased

person’s enterprise.

Deceased Estate: Taxable Supplies and output VAT

Examples include

Continuing the deceased vendor’s enterprise temporarily

Realisation of assets of the enterprise used for the making,

wholly or partially, of taxable supplies

Cessation of the enterprise

VAT must be charged irrespective of whether the sale is made by

auction or by other means

The VAT so charged will constitute output tax in the hands of the

estate and must be accounted for on the estate’s VAT returns

There are, however, some exceptions where VAT need not be

charged, for example, the supply of a motor car will not be a

taxable supply unless the deceased person traded in motor cars

or was otherwise entitled to deduct input tax on the acquisition of

the motor car

Deceased Estate: Taxable Supplies and input VAT

The executor may also deduct input tax in respect of costs

incurred to make taxable supplies during the course of winding up

the estate.

The following are examples of claims which may arise from

exempt supplies and the estate will therefore not be entitled to

deduct input tax in respect thereof as no VAT would have been

charged on these supplies:

Loans of money made to the deceased person, including loans

secured by mortgage bonds;

Life insurance policies (unpaid premiums), pension provident or

retirement annuity fund contributions (unpaid contributions);

Unpaid medical aid contributions;

Outstanding rental in respect of the deceased person’s dwelling.

Deceased Estate: Distribution of enterprise assets

Distributions to heirs and legatees

The executor will become personally liable for outstanding tax if

any assets of the estate are distributed to beneficiaries while the

estate’s tax remains unpaid.

The distribution of any asset in the form of a bequest or legacy is

a supply of goods or services, except in the case of a monetary

distribution as “money” is specifically excluded from the definitions

of “goods” and “services” in section 1(1) of the VAT Act.

The executor should classify the various assets of the estate into

one of the following categories:

Assets which formed part of the deceased’s enterprise

(wholly or partially);

Assets which did not form part of the deceased’s enterprise

Deceased Estate: Distribution of enterprise assets

It is necessary to determine the relationship between the

beneficiary and the deceased to establish whether the parties are

regarded as “connected persons”

The term “connected persons” is important as supplies between

certain persons falling within the ambit of the definition of

“connected persons” in section 1(1) of the VAT Act will most likely

occur in the course of winding up the estate of a person.

As a result, the application of special time and value of supply

rules may need to be considered by an administrator when

determining the VAT treatment of certain supplies made in that

process.

Deceased Estate: Connected persons

Natural persons

A natural person is considered to be a connected person in relation

to –

any relative of that natural person, or

any trust fund in which the natural person or relative is, or may be

a beneficiary.

The terms “natural person” and “relative” include the deceased or

insolvent estate of that natural person or relative.

A relative, in relation to any person, means:

The spouse of that person;

Anyone related to that person or his/her spouse within the third

degree of consanguinity, or

Any spouse of the relative.

Deceased Estate: Consideration

The estate is liable to account for VAT on the distribution of goods

and services that formed part of the deceased’s enterprise.

Output tax is calculated by applying the relevant tax fraction to the

consideration charged, which, in most cases, will be nil where

assets are bequeathed to a legatee or heir without a bequest

price. In this case the output VAT is nil

However, if the special value of supply rule for “connected

persons” in section 10(4) applies, VAT must be accounted for on

the open market value of the goods, notwithstanding the fact that

no consideration was payable.

The bequest of a limited interest (eg ususfruct and/or bare

dominium) must also be considered for VAT purposes

Deceased Estate: Consideration

Section 10(4) of the VAT Act

Where a vendor (the estate) supplies goods to a connected

person (eg relative of the deceased) for

No consideration, or

A consideration that is less than the open market value (OMV)

and

Had the connected person recipient paid an OMV

consideration, the connected person recipient would not have

been able to claim a full input VAT (eg non vendor, vendor

making partially non-taxable supplies)

The consideration of the supply is deemed to be its OMV

Estate must account for output VAT: OMW x 14/114

Deceased Estate: Consideration

Example (VAT Guide page 25)

Scenario

G, a vendor, was the owner of Z Catering. G bequeathed a delivery

vehicle (single cab bakkie) which was used in his business to his

son (a non vendor student). The rest of the business assets were

bequeathed to Z Catering’s employees who are not related to G.

All G’s private assets were bequeathed to G’s spouse.

The open market values of the assets were as follows:

Delivery vehicle – R25 000

Other business assets – R50 000

Private assets – R1.5 million

Question

What is the VAT effect on G’s estate?

Deceased Estate: Consideration

Solution

G’s son is a connected person who will not be using the delivery

vehicle to make taxable supplies, therefore section 10(4) applies

and the estate is liable to account for VAT on the open market

value of the vehicle. Output tax due in respect of the vehicle is

R25 000 × 14 / 114 = R3 070.18.

The employees of Z Catering are not connected persons in

relation to G and therefore the general valuation rule applies.

The value of these supplies is nil as the employees are not

required to pay any consideration to acquire the assets.

Output tax in respect of these assets is therefore nil.

G’s private assets did not form part of G’s enterprise and the

distribution thereof to G’s spouse is not subject to VAT.

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